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Oil set to rise above $90 a barrel

Oil is set to rise above $90 a barrel this year as the global economic recovery drives demand, it was reported today.

Investment fund Hermes Commodities predicts the rebound will be driven by rising demand for trucking and shipping fuels, according to the Daily Telegraph newspaper.

The increase would put oil prices at more than double the low of $40 per barrel reached in the winter of 2008, when prices fell on the back of lower demand for transport fuel during the recession.

But the cost of oil has rebounded strongly since then, with prices reaching $84.01 a barrel yesterday, the highest level since October last year.

The increase has been driven by a combination of investors turning to the commodity as an alternative to the dollar, as well as moves by oil cartel OPEC to limit supply.

But Hermes Commodities believes the price still does not reflect the fact Western economies have emerged from recession.

David Hemming, portfolio manager for Hermes, said oil prices were likely to drop in the short term because there is still an excess of supply.

But he added that the global economic recovery and strong demand from China would begin to reverse the situation, while the potential for political conflict in Iran and Iraq had also been factored into the group's forecast.

He said: "As Iran's rhetoric becomes more inflammatory the US could be forced to appear to take action.

"If action is taken, then it will put an upward pressure on oil prices, as an invasion could constrict Iranian supply."

Even if oil does reach $90 per barrel, the price will still be well down on the record high of $147 per barrel it hit in July 2008.

However, analysts from Commerzbank disagree with the Hermes prediction, and instead expect the price of oil to fall to 65 US dollars per barrel by the middle of this year, before recovering to around 70 US dollars per barrel by the end of it, according to the Daily Telegraph.

It said: "Since the beginning of March, oil prices are holding steady above 80 US dollars per barrel, while fundamental data are basically unchanged.

"The rise in demand for oil is still coming almost exclusively from emerging countries, especially China.

"As oil supply is rising at the same time, the market is unlikely to tighten."